When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Jumbo Interactive Limited (ASX:JIN) as a stock to avoid entirely with its 34.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
There hasn't been much to differentiate Jumbo Interactive's and the market's retreating earnings lately. It might be that many expect the company's earnings to strengthen positively despite the tough market conditions, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Jumbo Interactive
How Is Jumbo Interactive's Growth Trending?
Jumbo Interactive's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.3%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 146% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 9.1% each year over the next three years. With the market predicted to deliver 18% growth per year, the company is positioned for a weaker earnings result.
With this information, we find it concerning that Jumbo Interactive is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Final Word
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Jumbo Interactive's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
It is also worth noting that we have found 2 warning signs for Jumbo Interactive that you need to take into consideration.
If you're unsure about the strength of Jumbo Interactive's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About ASX:JIN
Jumbo Interactive
Engages in the retail of lottery tickets through internet and mobile devices in Australia, the United Kingdom, Canada, Fiji, and internationally.
Outstanding track record, undervalued and pays a dividend.
